The UK non-prime lending market has contracted by more than a third (34%) since 2019. Meantime, unsecured loans from unregulated lenders have risen significantly. That is the key takeaway from a whitepaper published by ClearScore, the financial services marketplace.

The whitepaper – Building a non-prime lending market that delivers for UK consumers – uses analysis by EY. It reveals this contraction is even steeper for sub-prime customers. They have endured a 76% decline in the number of loans offered since 2019. This sharp decline comes as many guarantor loans and high-cost short term credit products have been removed from the market. This results from a combination of regulation and commercial considerations.

Since 2019, guarantor loans to sub-prime customers have declined 99.6%. High-cost short term credit loans to sub-prime customers drop by 96%, and home credit loans to sub-prime customers down 91%.

Against this backdrop of rapidly declining availability of regulated credit to sub-prime customers, unregulated lending has risen. This includes Buy Now Pay Later (BNPL) and in some instances, illegal money lending. The rate of BNPL loans to unserved customers grew 53% since 2021. In October 2023, a fifth (almost 20%) of unserved consumers using BNPL were already in arrears.

The whitepaper sets out recommendations for regulators and Government. The aim is to support and broaden access to the regulated market.

Building a non-prime lending market that delivers for UK consumers: recommendations include:

  • Setting a clear strategy and vision for a well-functioning non-prime lending market to rebuild investor confidence and to broaden access to regulated credit for a wider group of customers;
  • A commitment to reviewing how the cost of credit is communicated to customers. This is both to increase understanding of the true cost and improve investor and lender appetite to offer shot-term loans to non-prime customers;
  • Working with the Financial Ombudsman Service to provide greater clarity on the role of open banking in underwriting for higher risk borrowers to support better lending decisions and offer better rates to consumers.

Non-prime market is broken

Andy Sleigh, COO, ClearScore, said: “The non-prime lending market is broken. This creates a dangerous situation where already vulnerable consumers are being shut out of accessing credit. At ClearScore, we believe that everyone deserves access to affordable and appropriate credit for their individual circumstances. With the continued cost of living squeeze, however, these people are being forced towards unregulated, and sometimes high-cost options. These can have major long-term implications on their financial resilience and overall wellbeing.

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“The problem has gone ignored for too long. The government and regulator need to step up and commit to creating a fair, accessible and sustainable market which delivers better outcomes for all consumers across the credit spectrum.”

The need to broaden access to regulated credit

Christopher Woolard, Partner at EY, and Chair of the EY Global Regulatory Network, added: “The UK consumer credit market has seen a decline in choice for consumers in recent years. This is especially for those considered to be at the ‘higher risk’ end of the scale. This research highlights that more must be done to help those who need to access credit. Both the UK government and regulators have recognised the need to act and make changes. But this analysis shows more speed is required. The UK needs a long-term strategy for the non-prime lending market, combining efforts from the public and private sectors to rebuild confidence and broaden access to regulated credit.”